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I suspect that the two extremes have it wrong! Ultimately, I believe it
will be the retailers who thoughtfully integrate bricks and mortar
stores, regional distribution, and internet stores who will take the
cake. The bricks and mortar offer a shopping experience, ability to
touch and feel, immediate acquisition, and local customer service.
Regional distribution provides a faster (generally next day UPS delivery
to home or store for pickup) and more cost effective (more efficient
long haul transportation) than do a few major national distribution
centers. The internet offers convenience in shopping for products with
known attributes 24 hours per day along with the potential to provide
custom items e.g. clothing manufactured to order.
Retail stores were already well over built before the internet came
along although the internet will take the blame for the shake out which
would have occurred anyway. Of all the major retailers, Wal-Mart was
probably the best positioned with retail and regional sites, but their
approach to a separate internet retailing company will not deliver the
integration which will be key to successful retail distribution because
employees will view them as competitive rather than complementary.
Earl
----- Original Message -----
From: "JW" <JW@xxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Sunday, January 16, 2000 3:40 AM
Subject: [RT] Real Estate
Interesting article...
JW
http://www.thestandard.com/article/display/0,1151,8897,00.html?nl=int
January 14, 2000
Under the Knife
Wall Street "cybersurgeons" are about to cut into retailing, forcing
store
closings. That's bad news indeed for real estate investors.
By Mark Borsuk
Wall Street this year will be pressuring large retailers to create
"channel
leverage" by strengthening their online sales at the expense of store
expansion. This is going to create a new breed of investors – call them
"cybersurgeons" – who will slice and dice retailers that cannot become
true
multichannel merchants. And the cybersurgeons' cure could become a
bloodletting for both property owners and for real estate investment
trusts,
or REITs – publicly traded portfolios of property investments.
Expect a schism to develop between mass merchandisers and retail
property
owners over the value of location. Formerly, merchants and landlords had
parallel goals – the best location generated the highest sales, paying
the
most rent. The online sales channel turns this rule on its head. Now
cyberspace competes for merchants' attention.
Look for Wall Street analysts to demand that retailers curtail new store
growth, reduce the number of locations and shrink store size. The
punishment
for slackers and those failing to provide superior online execution will
be
stock downgrades and credit rationing. Some will end up in the
cybersurgeons' operating room.
Cybersurgeons are hostile takeover specialists hoping to maximize a
firm's
value by selling it piecemeal or re-engineering a store's core strengths
for
the information age. Their goal is to find a retailer with sufficient
brand
equity to prosper online while cutting back on brick-and-mortar
locations.
Strangely enough, retail merger and acquisition activity in the 1980s
centered on the value of real estate. Now cybersurgeons are hell-bent on
reducing stores.
For aggressive cybersurgeons, three characteristics dominate patient
selection. First, the merchandise must consist of brands, standardized
goods
and self-service items. Books, CDs, consumer electronics, pet items,
sporting goods, office supplies, groceries, health and beauty products,
and
toys all fit the bill. Second, customer demographics must be favorable
to
buying online. Finally, does Pareto's Rule apply? Do online customers
generate the bulk of profits? If so, cybersurgeons will risk downsizing
or
closing stores that serve customers who generate only a fraction of the
profits.
Cybersurgeons will carve up retailers with depressed stocks. They will
prescribe a merchandising strategy aimed at the most profitable
customers.
They'll also make purchasing easier online, convert some locations to
showrooms, radically cut costs, substantially eliminate noncore
personnel
and management, and centralize inventory.
Cybersurgeons will present landlords with painful choices. They are
likely
to demand cheaper rent and take less space. They may "go dark" while
continuing to pay rent. The going-dark scenario is particularly deadly
for
landlords because the loss of a key tenant cuts foot traffic for other
retailers. Lease termination by bankruptcy can be worse, with wider
implications for property investors such as pension funds and insurance
firms.
The retail property community is confronting a growing sense of
irrelevancy
and obsolescence in several ways. The International Council of Shopping
Centers and the National Association of Real Estate Investment Trusts
joined
the so-called e-Fairness Coalition to oppose favorable tax treatment for
online transactions. They hope to increase customer costs and slow the
growth of e-commerce. The ploy is completely misdirected. In many cases,
buying online is more convenient – it offers better comparison shopping,
provides greater selection, is less expensive and saves time in
comparison
to brick-and-mortar stores. Manipulating the sales tax issue will not
force
shoppers back to stores.
Cybersurgeons may also turn their attention to distressed retail REITs.
Retailers receiving the cure are also likely REIT tenants. To avoid
evisceration, REITs may be forced to dump properties at fire-sale
prices.
The trick will be to align themselves with nonretail users. Adaptive
reuses
of big-box retail stores and supermarket-anchored community centers is
inevitable.
The information age symbolizes the shifting of wealth from tangible to
intangible assets. Cybersurgeons will exploit the opportunities in the
transition. Online buying's negative impact on retail property is part
of
the economic and social upheaval ahead.
Mark Borsuk, a property attorney and retail leasing broker, is managing
director of the Real Estate Transformation Group in San Francisco.
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